April 24, 2023
The CFA Society Boston held its 37th Annual Market Dinner on April 4th, featuring Morgan Housel as the guest speaker for the evening. Mr. Housel is the author of The Psychology of Money, which has sold over 3 million copies and has been translated into 53 languages. This book tells 19 short stories explaining the strange ways people think about money and tries to teach one how to make better sense of one of life’s most important topics. Mr. Housel is a Partner at the Collaborative Fund – a venture capital firm providing seed and early-stage funding to technology companies and was a columnist and analyst at The Motley Fool for nearly a decade. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of the New York Times Sidney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He serves on the board of directors at Markel and is a graduate of the University of Southern California (USC).
In a fireside chat with Heather Young the CFA Society Boston Chair, Morgan was asked to discuss the psychology of money. His speech modeled the format of his best-selling book, giving background and real-life shirt stories and using them to demonstrate how people view money. Robert T. Stephenson, J.P. Marvel’s Executive Vice President and Director of Research, attended the event with his colleague Simon Howe and provided the following report:
Mr. Housel introduced himself as an author and former columnist who considered himself a behaviorist of money. He got into the market in 2008 right after graduating from college – a rather unfortunate time to start with the financial crisis and the housing bubble bursting. He wondered why we had this crash and what actually happened. He said he answer was not in any financial textbook but was easier to understand if you looked through the lens of psychology. People have a blind spot when it comes to finance and economics and that problem leads to too many people trying to keeping up with the Jones. He concluded that one’s experiences and fears influence the decisions one makes, especially in how people behave with money, and he shared three stories of this behavior in action.
The first was titled “Lifestyles.” He told of a contest held in the 1960’s by The Sunday Times, a boat race around the world, with the winner receiving 5,000 pounds. Of the twelve sailors taking the year-long journey, Mr. Housel told the story of two of the “losers”. The first man was described as a failure at life and a terrible sailor to boot – this was his last chance to be successful. In October of 1968 he sailed south in a self-made boat. After ten months, he had made it halfway down the coast of Africa before his boat sprung a leak. If he kept going further south, he would not make it, so he decided he had three choices: turn around, die, or lie. He decided to drift around the Atlantic Ocean for three months, sending back fake updates and killing time to make it seem as if he was sailing across the world. Realizing he may win, he began to fear the scrutiny winning would bring and he realized the jig was up. He sent out his final coordinates and ten days later his boat was found intact without him on it. No one knows what happened, but the only explanation is that he took his own life.
At the same time, another contestant, one of the best sailors in the world, was making his way back to England to win the race. A true sailor’s sailor, he hated the commercialization of the sport. He realized that if he won the race, he would receive endless publicity and sponsorships – the exact thing he hated. Fed up, he sees a commercial fisherman’s ship and writes a letter to the editor-in-chief of the Sunday Times, in which he announces that he is quitting the race. He docks in Tahiti, marries a local woman, builds a house, and quits sailing.
What does this have to do with money? Many of us, both in our personal lives and in our financial lives, live like the first sailor – we base our satisfaction on outside validation and approval. However, what Mr. Housel suggested is that within our financial lives, meaningful satisfaction comes from within: do we have enough money to live the life that we want for ourselves, regardless of outside validation? While it is always nice to beat the market benchmarks, internal financial happiness should trump external pressures.
The second story was titled “Goalposts.” He showed a photo of Stephen Hawking, the world-renowned genius of physics. Although he was widely recognized as speaking through a computer due to a motor neuron disease, he was born a normal bodied person and lived as such until he was 21 years old. In an interview with the New York Times, he proclaimed how lucky he was to do his research, which was odd considering what happened to him. He explained that his secret to happiness was that his expectations were reduced to zero when he was 21 – everything that happened after was a bonus. Mr. Housel suggested that how people feel about their money is similar to how Stephen Hawkins looked at his life post-diagnosis; financial happiness is based on the expectations we set for ourselves.
Housel then asked the audience to name the US’s most prosperous decade, which we decided was the 1950s. Looking at the numbers objectively, however, paints a different picture. n the 1950s the median household income was $29k, by 1960 was $41k, and now it is more than twice that amount. The average hourly wage relative to inflation is now twice as high. A house then was half the size it is now. Food commanded 1/3 of one’s income the 50s and is now a much smaller portion. Half of men over the age of 65 were still working and now less than 23% are doing so. If the average person is objectively better off now than they were then, why don’t people feel that way? The 1950s were unique period in the western world, in which we had 10-15 years of relatively little wealth inequality. Many people measure their economic well-being relative to other people so if everyone was making about the same as you everything seemed great. Smaller incomes and houses seemed fine since everyone else was in the same place as you. Recently, the income has doubled but the expectations have more than doubled. Mr. Housel posited that “if your expectations grow faster than your income, you will never be happy with your money.” Shifting to the story of Bernie Madoff, he explained that the most amazing part of Madoff’s story is that in the 1980s he was one of the US’s most successful businessmen, making $20mm a year from his legitimate market making business. His desire for “more” ultimately led to his downfall. Mr. Housel said that “enough” is a very important word; everyone wants more money, but it is important to know when you have enough.
The final story was titled “Experiences.” This was a story about nuclear energy power plants in the 60s and 70s. In that time their huge concerns about the world having enough energy. Austria built a $3b power plant that could supply 15% of all the power they needed. Austria started a public awareness campaign to explain the benefits of nuclear energy, but it turned out to be the single worst public info campaign in human history, spreading fear among Austrians. In 1976, Austria held a referendum and left it up to the people whether to turn on the nuclear plant. In a landslide, the people voted no, and the plant was never even turned on. At the same time, France, Germany, Canada, and the US all built nuclear plants decided the risk was worth the reward. What this shows is that when people think about risk, they often don’t think about it analytically, but culturally. It is tied to where you live, how you grew up, and your generation. You are tethered to your own personal life experiences and that affects how you think about investing. If you were born in 1970, the market went up tenfold in your financially formative years. However, if you were born in the 50s it was flat. Based exclusively on the circumstances of their birth, two people born in the exact situation 20 years apart can have wildly disparate experiences and views. Nothing is more persuasive than your own experiences. In December of 2010, a white female with college degree experienced a 3.7% unemployment rate, yet at the same time a black man aged 18-26 experienced a 48.5% unemployment rate. They will have two totally different opinions on things, as they are looking at the same world through different lenses. The most important thing an investor can do is speak to as many people as possible and open your mind to the lenses through which they see the world. People who make different decisions than you may not be crazy. People with different experiences, goals, and risk tolerances are going to act how they think is right – there is no one right way to invest.
He concluded with his final thought. “You have no control over what the market does next. You can only control your own behavior.”
They next went into the Q and A portion of the evening. He was first asked about social media outlets and how it may have affected the Silicon Valley Bank situation. He states that there have been many bank runs in the past, but nowadays when someone yells fire people react much more quickly than they used to. If you had asked those who panicked in advance if they would have the personality of someone who would panic, they probably would have said no. When things hit the fan people underestimate how much they will panic as they respond to what others are doing.
He was then asked about studies that have shown that portfolio managers manage their personal portfolios differently than they do their managed fund and the disconnect between the two. He reminisced on a CNBC interview in March of 2009 near the bottom of the market. David Faber was interviewing a bunch of money managers who all said they thought this was the bottom of the market. Faber then asked them if they would be putting their clients’ money to work now, and they said no because they did not want to be burned again. Another example of psychology affecting rational investment professionals.